Little known outside its own industry, the group dominates the worldwide footwear industry -- and is now...
By Richard Dobson
When you put on a pair of shoes, whether athletic or casual footwear, there's an excellent chance they were made by Taiwan's Pou Chen Corp. In fact it is estimated that the company produces one in almost every six pairs of branded shoes sold in the world each year, making it the largest shoemaker on the planet. But as with many of Taiwan's major companies, Pou Chen, which does not sell shoes under its own brand name, has never gained the international renown that its strength in its industry would suggest.
Through its main subsidiary, Yue Yuen Industrial (Holdings) Ltd., the company operates as an original equipment manufacturer/original design manufacturer (OEM/ODM) making shoes on a contract basis for global footwear giants such as Nike, Adidas, Reebok, Timberland, ASICS Tiger, New Balance, and Rockport. Pumping out over 130 million pairs of shoes last year, the Hong Kong-based Yue Yuen accounted for around 17% of the global market for branded athletic and casual shoes and is the major revenue source for its parent, Pou Chen. Currently Pou Chen directly holds a 49% stake in Yue Yuen but plans to increase the share to 51% in the near future. The bulk of the remaining stock is controlled by Pou Chen subsidiaries and by the group chairman, Tsai Chi-jui, 65, the founder and driving force behind the group's success.
Yue Yuen's achievements were recognized in May when it was added to the exclusive blue-chip Hang Seng Index and the Morgan Stanley Capital International ("MSCI") Standard Index Series. Over the last 12 months Yue Yuen's stock has risen in value by 50% from HK$11.50 on July 25 last year to HK$23 one year later, bolstered by higher earnings and profit growth on the back of aggressive expansion in its upstream production capacity and strong overall growth in the shoe manufacturing business. During the same period, both the Hang Seng and the Hang Seng Composite Index dropped in value.
While comfortably ahead of its competitors in the shoemaking world -- one senior executive estimates that its annual revenue is four times that of its nearest rival -- the company isn't showing any signs of preparing to slow down. An aggressive consolidation of Pou Chen's upstream supply chain together with the expansion of sales and marketing channels in China are providing further impetus for growth. But even more intriguing is the company's move into a whole new area of business: high-tech manufacturing. Over the past few years, Pou Chen has been aggressively investing in technology-oriented firms in China, mostly makers of components for computers and peripherals.
Some observers have expressed skepticism about the wisdom of the move into unfamiliar territory, but those close to Tsai Chi-jui say it's just another example of the gutsy approach to business with which he built a shoemaking empire from humble beginnings. Instead of waiting for ideal business conditions, says a Pou Chen senior executive, Tsai keeps his eye on the long-term objective and plunges ahead to bring the best possible results even when conditions are less than favorable. "He's the kind of person whose mind is always filled with new ideas" -- and he is ready to act on them, said the executive.
Tsai's involvement in the shoe industry was the outgrowth of his talent for design. After growing up in a household where both parents were weavers of traditional Chinese fabrics, Tsai majored in art at Taichung Normal University and then taught at an elementary school in central Taiwan. Soon he was also putting his artistic talents to use as a part-time designer for local footwear makers.
In 1969 he and his three brothers set up Pou Chen, which is based in Changhua County. Riding Taiwan's export-fueled economic boom throughout the 1970s, Pou Chen began to break into the global footwear market through some small contracts to make shoes for international brands such as New Balance. Its big break came in 1980 when Pou Chen signed Adidas as its first major client. Since that time, Pou Chen's client list has swelled to over 40 major international brands and its production facilities have multiplied. To better manage the company's growth, Tsai in 1988 established Yue Yuen in Hong Kong to take charge of all Pou Chen's shoe production business. Pou Chen, with Tsai's brother Tsai Chi-neng as chairman, now manages R&D and human resources for Yue Yuen.
The formation of Yue Yuen also facilitated the move of Pou Chen's production lines to China after rising labor costs began to impede the expansion of manufacturing facilities in Taiwan. Yue Yuen now operates 279 production lines -- 156 located in China, 72 in Vietnam, and 51 in Indonesia. Pou Chen today maintains only five lines in Taiwan, used mainly for final assembly processing for the local market. Due to rising labor costs and political unrest in Indonesia, Yue Yuen has put expansion there on hold while increasing the number of its lines in Vietnam and China. In the first half of this year, it spent US$80 million on the construction of new factories and facilities in these two countries, adding 25 new production lines. Across the region, the group now employs over 250,000 people.
Besides being able to manage such a large work force efficiently, Pou Chen has excelled at maintaining a close relationship with clients. "One secret of our success is that we try to develop long-term partnerships with our key customers and help them to cut production costs," says Terry Ip, investor relations manager at Yue Yuen. In one of the latest examples of such collaboration, Pou Chen is currently preparing to create an R&D center with one of its main clients, Nike, in its new global headquarter complex being built in Taichung City. The complex, located near Tunghai University, is expected to be completed around the end of next year and will include two high-rise buildings, one of them housing a five-star hotel.
The company's relations with its offshore employees haven't always been smooth, however. In 1997, Pou Chen and Nike came under heavy criticism in Vietnam for alleged abusive treatment of workers and paying less than minimum wages. Yue Yuen's Ip describes the incident as "isolated" and maintains that the company has since implemented stringent corporate responsibility programs to ensure that all factories meet clients' requirements on codes of conduct on the treatment of labor.
The incident did little to affect the company's financial performance. Indeed for the last 10 years, the group has enjoyed stunning growth. This year, boosted by some significant supply chain restructuring and by key acquisitions, Yue Yuen looks set to chalk up further impressive growth. In the second half of Hong Kong's fiscal year, which ended March 31, revenue increased by 36.6% to reach US$1.2 billion year-on-year, while net profits rose 37.1% to US$151.6 million. The total number of shoes produced amounted to 79.6 million pairs, an increase of 30% over the same period last year.
The strong growth was partly attributed to parent Pou Chen's November acquisition -- for US$427 million -- of 67 companies, mostly based in China, engaged in the manufacture of raw materials, production tools, and shoe components for shoe manufacturing. "The acquisition of these significant upstream businesses will enable Yue Yuen to expand its core footwear business and to further consolidate its market leadership," said Tsai Chi-neng in Pou Chen's 2002 annual report.
At the same time, the company is also looking downstream. Hoping to capitalize on China's recent entry into the World Trade Organization and on the enthusiasm surrounding the 2008 Olympic Games in Beijing, Yue Yuen is busily expanding its sales presence in China. Sales to China now account for only around 2% of the company's global business (the biggest market is the United States, which accounts for 51.6% of sales, followed by Europe with 27.2%).
This February, Yue Yuen acquired an interest in Symphony Holdings Ltd., a listed Hong Kong firm that manufactures and markets shoes. The transaction is expected to enhance the group's reach across the border into China, where it has already signed up a total of 550 wholesale distributors. It has also invested in some 175 retail chain stores and holds exclusive sale rights for Converse, ASICS, Coleman Footwear, and Hush Puppy throughout China. Another US$10 million to US$20 million has been earmarked for new acquisitions in China this year.
To facilitate its expansion, Yue Yuen has also moved into logistics. In April last year, it set up a joint venture company with Logistics Information Network Enterprise, a wholly-owned subsidiary of Hutchison Port Holdings. The new company, called SupplyLINE Ltd., will provide logistics support for the group's footwear, apparel, and electronics products.
But even as the company consolidates its core business, Tsai Chi-jui is testing his hand at new ventures to bring more diversification to the group. The chairman has concluded that since Pou Chen already so dominates the worldwide footwear industry -- and since the contract shoe manufacturing business is virtually saturated -- other sectors will have to provide the future engine for growth, say company executives. They note that Tsai also believes that the basic manufacturing experience gained over decades in the shoe industry can be applied to other products, such as electronics. Among Pou Chen's new subsidiaries is TDV Vision Inc., an OEM supplier of CRT and LCD displays and tablet PCs with production lines located in China. The company launched its range of products in the U.S. market in March this year.
Tsai's new approach has its detractors. "For a traditional manufacturer to go into the high-tech sector is not a wise idea," said one analyst at President Securities. "To invest in TFT or other high-tech production lines requires [heavy investment in] capital and human resources -- it's difficult for a traditional manufacturer to make that transition." But Pou Chen considers that it can overcome any inherent weaknesses by working together with strong partners with high-tech backgrounds. In particular, it has developed a close relationship with Chi Mei Optoelectronics Corp. Pou Chen recently upped it stake in Chi Mei affiliate Pro Arch Technologies -- an OEM manufacturer of TFT LCD displays -- to 52%. According to local press reports, Chi Mei and Pou Chen are also talking about jointly establishing a liquid crystal module plant in China.
In line with its penchant for vertical integration, Pou Chen is also negotiating a deal with Taiwan's K-Bridge Electronic Co. to set up two joint-venture plants in China's Guangdong Province to supply TFT-LCD backlight panels to Pro Arch and the proposed Chi Mei joint venture. Other recent projects in China have involved investments in companies manufacturing IT products and communications equipment.
Most of the new investments have been conducted through Pou Chen's wholly-owned subsidiary, Wealthplus Holding Ltd.
Pou Chen has also invested in real estate, setting up a 3,100-acre industrial park in Guangdong's Huangjiang County. The US$1-billion project also includes a residential area, commercial complex, and hotel. Housed in the park are some of Pou Chen's shoe and electronics production lines, as well as those of some other well-known Taiwanese firms including TECO and Gigabyte. The group is now looking at setting up a similar park in Jiangsu Province.
After successfully making the leap from art to shoemaking, Tsai is confident that he can carry off the next stage of moving into electronics and property development, say his colleagues. Considering the profit levels that Pou Chen has been able to rack up over the years, he certainly can afford to try his hand at something new.